Today I bought shares of Intel (INTC), the world's largest semiconductor chip maker. The company dominates the market for microprocessors in personal computers (PCs) and continues to be a leader in technological product development.
Intel has produced solid operating results in recent years, with 5-year growth rates of 8.8% for revenue and 22.7% for earnings, high margins, strong cash flows, and good returns on equity. The company's financial position is excellent, with $13.7B in cash, $7.2B in debt, debt/capital of 13.4%, debt/equity of 14.8%, 189x interest coverage, and a current ratio of 2.4. It has an A+ credit rating from S&P and a safety rating of 1 from Value Line.
For a tech company, Intel has a pretty good dividend history. The company has increased its dividend for 9 consecutive years and has a 5-year dividend growth rate of 14.4%. The most recent dividend increase was 7.1%, announced in May. The payout ratio is a modest 38%.
Regarding valuation, I consider Intel to be undervalued with a P/E of 9.6 (its 5-year average P/E is 17.1), P/S of 2.1, and PEG of 0.9. Using a Dividend Discount Model with a below-average dividend growth rate of 9% and a discount rate of 12%, I calculate a fair value over $32 per share, which I think is a reasonable estimate.
Intel's stock price has been beaten down in recent months, reaching a 10-month low today. The stock is trading 20% below its 52-week high set in early May. The drop in stock price reflects the perception that PC sales are on the decline and the recognition that Intel has yet to gain much market share in mobile devices. In addition, earlier this month the company lowered its quarterly revenue outlook. I think the fears about PCs being replaced by tablets and smart phones are overblown. There are many workplaces (such as my own) that will likely continue using PCs for many years, in part because they are much more powerful than mobile devices. I also think the concerns about Intel's lack of presence in the mobile market are overdone. To put a positive spin on it, given that the company has yet to gain much market share in the area, there is plenty of room for future growth. Intel invests heavily in R&D and has top-notch fabrication facilities, so I think it is only a matter of time before they make significant inroads in the mobile market.
I bought 65 shares of INTC at the price of $22.62 per share, giving me a 3.96% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $14.63, which will add a total of $58.52 to my annual dividend income. Intel is now the 23rd stock in my portfolio and my first new position since April. Even though I am wary of the technology sector in general, Intel is a solid, profitable company that I feel comfortable having in my portfolio. For that reason, I would consider increasing my position on a further decline in the stock price.
I am pleased that I was able to find a second great opportunity to deploy cash this month (the first being my purchase of NSC last week). I think I am getting better at appreciating that it is a "market of stocks" rather than a stock market, so regardless of what the broader market is doing, it is best to stay focused on finding individual dividend growth stocks that are available at attractive valuations.
Great purchase DGM! I'm also thinking about buying INTC for my portfolio. However, I feel uncertain about the fundamentals of the company long term. First, INTC's capex increased from $5 billion to $11+ billion from last year. They're highly capital intensive for a technology company. Second, every year INTC has to sell a better version of their products at the same or cheaper price. Lastly, INTC has to keep innovating to keep up with the competition. They spend $9+ billion on research and development. Perhaps I'm over thinking things here. What are your thoughts?
ReplyDeleteHenry: Thanks for your comment. Regarding the recent increase in capex, the company is spending several billion dollars building new, state-of-the-art fabrication facilities in Arizona and Oregon. These facilities will strengthen the company's manufacturing capabilities and position it for future growth. Once they are completed, I would expect capex to come down a bit from current levels. It is notable that even with the large increase in capex in 2011, their free cash flow payout ratio was still less than 50%.
DeleteRegarding the need for continued innovation in the face of competition, that is a major risk with any technology company, which is why I mentioned I am wary of the sector. However, I think Intel is a strong enough company to weather short-term competitive hurdles and continue to perform well in the long run.
There is always the possibility that this investment will not work out -- that holds for every stock investment. However, by purchasing INTC when it is undervalued, I am giving myself a margin of safety that helps to reduce my downside risk. A dividend yield near 4% (which is covered adequately) also cushions any downside. Of course, I will also be monitoring the company, so if business conditions show clear signs of long-term deterioration, then I will re-evaluate the investment. That said, at the present time I have a positive view of INTC and its long-term prospects -- hence my decision to invest in the company.
wow, what a coincidence! I made the same purchase this morning, only I bought 2 less shares for 2 more pennies ;)
ReplyDeleteWhat are the odds?? Good stuff, I think INTC is a solid buy at 4% yield.
FI Fighter: Nice purchase! I guess we were both on the same investing wavelength today. :)
DeleteDGM,
ReplyDeleteGreat buy! INTC has been high on my list of potential buys and I came close to staring a position in my taxable account yesterday at the same price you did. I held off thinking it may go a bit lower with a pull back in the overall market or when they release earnings data for next month. My patience tends to get the best of me sometimes. This could be another scenario like last year when I didn't make a purchase at just under 20.00. One day I will learn...
Cheers
Stoic: Thanks! I also have a tendency to keep waiting for a lower price, but that has resulted in too many missed opportunities (I also passed up INTC under $20 last year -- a foolish decision). I am getting better at realizing that I need to buy a good undervalued stock when the opportunity is already in front of me, instead of waiting for a still lower price that might not be reached. In other words, I have to remind myself not to be greedy.
DeleteOne way to think about it is that if I buy a stock like INTC when it is undervalued, then one of two things will happen. If the price goes up, then by having established a position already, I will benefit from the capital gains. If the price goes down, then I get an opportunity to increase my position at an even better price. I am okay with both of these alternatives -- and I avoid a missed opportunity in the first case.
I think this is all part of the process of learning to become a better investor.
I think you made a good buy. If I hadn't already sold 2 puts I would have bought more shares myself. INTC is the only tech company I want to own currently. In a couple of years I believe INTC will be a big player in the mobile space.
ReplyDeleteaustinbroker: Thanks! I agree that INTC is one of the few tech companies worth owning, especially as a dividend growth investor.
DeleteDGM,
ReplyDeleteGreat purchase. I agree with you that they will eventually make inroads into the mobile space, and when they do I'd like to think they'll make a splash.
Quantitatively, this company is firing on all cylinders. Valuation-wise, it's extremely cheap and all the ratios are fantastic. We'll see what the future brings, but it's definitely my favorite tech company.
I own 170 shares now, so it's already a fully allocated position, but if it drops to $20 I'll likely add a little.
Best wishes!
Dividend Mantra: I completely agree with your assessment. Given that my position in INTC is relatively small, I would consider buying more shares on further weakness.
DeleteNice one. I wish I waited a little longer for my Intel purchase this month. My crystal ball failed me, haha. It's okay INTC has been kind to me over the years. Lovin the dividends.
ReplyDeleteI think you'll do well.
Compounding Income: Thanks! I rarely succeed at predicting when a stock will bottom out, so my crystal ball is flawed, too. I think the main objective is to purchase a stock at a satisfactory valuation rather than trying to time the bottom.
DeleteGreat site! Came across it from Seeking Alpha / INTC and I share a similar view in investing and am just starting out. You share a lot of great information. I like the spreadsheets you're using to track your portfolio and dividends - perhaps you'd look at making the files available to others?
ReplyDeleteKen: Thanks for visiting -- I'm glad you like my blog. Regarding my spreadsheets, I prefer to post screen captures of selected tables rather than the actual files, mainly to keep things simple but also for privacy reasons. However, it should be fairly straightforward for a person to reconstruct my tables, especially the dividend table.
DeleteINTC is on my list too. I'm just waiting to get in below $22 - which might be a bit greedy. Keep up the good buys!
ReplyDeleteHeaded Home: Thanks for your comment. If INTC were to dip below $22, then I would probably buy more shares.
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